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As you know, I’m a big fan of budgeting! Cash envelopes are one of the best ways to learn how to budget and keep your spending on track. If you’ve never used them before, cash envelopes can help you save money and get control of your finances.

Cash envelopes can simplify how you budget your money and help you learn how to budget better. Rather than relying on an app, setting up a spreadsheet, or learning a new budget software, you can jump into cash envelopes without the hassle. Here’s how to get started.

How to Budget Using Cash Envelopes

1.) Consider the benefits of using cash envelopes

If you think about it, most people spend more than they should because they don’t know where their money is going every month. Credit cards make it easy to overspend because you simply swipe your plastic card and go on your way. But cash envelopes provide a visual system to help you manage your money.

With cash envelopes, you’ll know when you’ve reached your limit because you can see when your funds are getting low. Instead of mindlessly spending with your credit card, you’re limited to the amount of cash you have in your envelope. This builds discipline and helps you reach your financial goals faster.

Plus, cash envelopes can make a great temporary emergency fund. Let’s say your car breaks down and you need to call a tow truck. If you have your cash envelopes with you, you’ll have the cash you need to pay for the tow and a ride back home.

2.) Establish categories and set spending limits

Before you can start with cash, you need to decide on a budget. Otherwise, how will you know how much you can put in each envelope?

If you’re new to making a budget, you’ll want to make a list of your income and expenses. First, gather your paycheck stubs or log in to your online bank account to find out how much you typically earn in a month. Get out a piece of paper and write your total income at the top.

From there, list your expenses, such as:

Mortgage or rent payment

Utility bills

Transportation

Food and groceries

Insurance

Medical and healthcare

Clothing

Credit card payments

Savings and investing

The next step is to set spending limits for each category. Budgeting isn’t an exact science, so it’s okay to estimate how much you think you’ll spend when you’re first starting. The important thing is to make sure you’re not budgeting more than you earn in a month.

3.) Ask yourself which categories you’re most likely to overspend

It might not make sense to switch to an all-cash budget for some categories. For instance, cash might not be the best choice for your mortgage or rent payment if it’s automatically drafted from your bank account. And if you have Netflix or Disney+, they only accept payment by debit or credit card.

But there are some categories that you’re more likely to go overboard with your spending. Groceries and restaurant spending are two categories that I must keep a close eye on. Otherwise, I could end up spending a lot more than what my budget allows!

Ask yourself which types of expenses you might struggle with and make sure to set up cash envelopes for those categories. The most common are groceries, clothing, hair cuts, entertainment, gifts, and transportation, so it’s smart to start with those.

The categories that I use cash for are: Groceries, Miscellaneous spending, pets, gifts and eating out.

4.) Label envelopes and stuff them with cash

Now that you’ve got your budget set up and picked out which categories to use cash, it’s time to get your envelopes set up. Regular envelopes that you buy from the dollar store are fine to use, but you can also buy envelopes designed for the cash envelope system.

Write the name of the expense category on the outside of each envelope.If you use the cash envelopes I created, I designed stickers specifically for the outside of the envelopes to make it easier to use months at a time. Then, every time you get paid, put the budgeted amount of cash in the right envelope.

For example, if you withdraw $250 from the bank, you might put $120 into the grocery envelope, $70 for gas or transportation, $30 for a hair cut, and $30 for entertainment.